Thinking of buying a new home?
Buying a property is likely to be the largest purchase you will ever make, and the decision on whether to opt for a leasehold versus freehold may well come down to your situation. If you’re looking to buy a flat, it’s likely that you’ll be looking at a leasehold property.
There are a number of different types of houses and several factors to consider when deciding whether or not to buy a leasehold property. First, it is important to be aware of the differences between freehold and leasehold ownership.
New Leasehold Reforms
The Leasehold and Freehold Reform Act 2022 has brought about the most significant changes to leasehold law in decades, empowering homeowners and offering greater security and control over their properties.
If you’re considering buying a leasehold property, it’s helpful to understand these new rights.
Lease extensions are now simpler and cheaper, and the standard lease term has been increased to a near-permanent 990 years.
Say goodbye to escalating ground rents, as these will be reduced to zero when you extend your lease. Challenging unfair service charges is also easier, and you’ll have more opportunities to take over the management of your building.
If you’re a freehold homeowner on a private or mixed-tenure estate, you’ll also benefit from increased transparency and rights over estate charges.
Read more: https://www.gov.uk/government/publications/the-leasehold-reform-ground-rent-act-user-guidance
What is a freehold property?
A freehold property is one where the buyer owns the property and the land it is built on outright.
The main advantage of owning a freehold is that you will not have to pay ground rent or service charges to a landlord, as you would with a leasehold property. You will also have more freedom when it comes to making changes to your property, as you will not need to get permission from a landlord.
However, there are some obligations to owning a freehold property. The major one is that you will be solely responsible for the maintenance and repair of your property and land, which can be costly.
What is a leasehold property?
Leaseholds are most common with flats, apartments and maisonettes. A lease is a contract between the leaseholder and the building owner that gives you conditional ownership for a fixed period.
Leasehold ownership gives you the right to live in and use the property for a set period of time – typically 99 or 125 years.
It offers flexibility and security, and can be a good way to get on the property ladder for first-time buyers or those on a budget. Before you make your choice, there are a few things to think about.
One key issue is that your lease will eventually expire, at which point you will need to either renew it or move out of the property.
However, the Leasehold and Freehold Reform Act 2022 has now significantly changed this. Leaseholders can now extend their leases by up to 990 years, providing greater security.
While leases with less than 75 years can still present mortgage challenges, the new legislation makes extending leases easier and more affordable, thus improving the marketability of such properties.
The Leasehold and Freehold Reform Act 2022 has simplified the process of obtaining a statutory lease extension and removed the two-year ownership requirement. Additionally, you can now extend your lease by up to 990 years, providing much greater long-term security. You will have to pay a lump sum to do this and it is prudent to have your own solicitor handling the paperwork.
When you buy a leasehold property the lease is not automatically extended, you just takeover the number of years left.
When viewing a property it is important to know whether the property is leasehold. If it is, enquire about the remaining term on the lease before you get carried away. If it’s too short already then you may not be able to buy it.
When the remaining years left drops below 75 then this would be classed as a short term lease.
Short term lease
At this point some of the high street mortgage lenders will class the property as unmortgageable and as the lease term becomes smaller, more lenders drop out.
Each lender applies their own rules but the main aim is for there to be 50 years left on the lease at the end of a typical mortgage term (25-30 years). As the lease term decreases so does the property value, as this is the lenders security against non-payment they always check leases.
For example if the lease had 70 years remaining and a 25 year mortgage was used to purchase it then there would only be 45 years remaining once the mortgage was repaid.
If you are trying to buy a property that has a short lease then there will be less mortgage choices for you. Your mortgage broker will be able to source the best option from those available.
If you are trying to sell a property with a short lease then this could take some time. Your property will sell for less money that an equivalent property that has a longer lease and fewer people will be able to obtain a mortgage due to the lease situation.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Ground Rent
Another consideration is ground rent. This is a fixed annual fee payable on existing leases in England and Wales that leasehold homeowners paid to their freeholder, essentially for the use of the land on which the property stands.
Long leases (those exceeding 21 years) frequently require a leaseholder to pay an annual ground rent, often hundreds of pounds a year, for which the landlord does not have to provide a clear service in return.
The Leasehold and Freehold Reform Act 2022 goes beyond just new leases. When extending an existing lease, the ground rent will be reduced to a peppercorn (zero). This can significantly reduce the long-term costs associated with leasehold ownership.
Ground rent is still payable under the provisions of a previous lease (pre-extension) until the end of the original term.
Another key consideration is that as a leasehold homeowner you may have less control over your property. For example, you may need to get permission from the freeholder before making any substantial changes or improvements to your home.
Homeownership overheads
Buying a flat in a larger building usually means that the common areas are managed by the building’s management company and you’ll pay a monthly fee as part of your lease.
These costs can apply to both inside and outside common areas. Typically, as a leasehold homeowner, a service charge will go towards a ‘sinking’ or ‘reserve’ fund.
With all the other leaseholders contributing to general maintenance costs, you’ll avoid the often significant expenses like roof repairs, painting and decorating of communal areas and, sometimes, even things like window replacement. Overall, you’ll have less of the direct homeownership overheads to worry about.
Freeholders responsibility
It’s normally the freeholder’s responsibility to insure the building, so you won’t need to worry about that either.
However, while freeholders will arrange the buildings insurance, most of them will re-charge this cost back to the leaseholders (you).
You will need to arrange your own contents insurance policy to protect your valuables and possessions.
Collective enfranchisement
Collective enfranchisement can give leaseholders more control over their homes and the building in which they live. It allows them to join together and buy the freehold of the building.
It will also provide stability, as the freehold will be owned by the residents rather than a third-party freeholder. Owners will have greater control over their homes and the ability to make improvements without the permission of the landlord.
The Leasehold and Freehold Reform Act 2022 has streamlined the collective enfranchisement process, making it easier for leaseholders to collectively purchase the freehold of their building. This gives leaseholders more control over their homes and the ability to make improvements without the permission of the landlord.
There are some downfalls to this process, such as the potential cost – which could be significant depending on the value of the property. And, of course, there is no guarantee that all residents will want to take this route.
https://www.lease-advice.org/advice-guide/ce-getting-started/
In summary
Ultimately, whether you choose to buy a leasehold or freehold property is a decision that should be based on your individual circumstances and preferences. There are pros and cons to both options, so it’s important to do your research and seek professional advice before making a decision.
This article provides a basic overview of the differences between leasehold and freehold properties.
Leaseholders may have less control over their property than homeowners, and freeholders will usually re-charge building insurance costs back to the leaseholders. However, purchasing the freehold via collective enfranchisement can provide leaseholders with more control over their homes.
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